It is fascinating to witness. At the very same time that investment titans like John Templeton, Warren Buffett and Julian Robertson, along with the world’s most respected economists like Paul Volcker and Robert Rubin are warning that risks to the financial markets and economy are the greatest they’ve ever seen, the markets are whistling a completely different tune.

The chart below is a picture of the Nasdaq Volatility Index, or VXN. These volatility indexes are frequently referred to as “fear gauges” because they represent how much protection, via put options, is being purchased by investors. A high reading means investors are increasingly protecting their portfolios. A low reading, conversely, means investors feel confident with less protection.

Despite the warnings by the heavy-weights listed above and detailed in “A Hard Rain’s A-Gonna Fall,” the VXN recently hit an all-time low. In other words, investor fear has hit an all-time low. Complacency reigns.

Another interesting visual representation of investor sentiment is the ratio of the S&P 100, the 100 largest stocks in the market, to its volatility index, the VIX.

As you can see from the chart, this ratio has just recently surpassed its last peak in mid-2000. Investor optimism is even greater today than during the largest stock-market mania of all time. If I didn’t see it with my own eyes I wouldn’t believe it.

With the epic dichotomy between the opinions of the world’s true financial sages and the message of the markets someone’s going to be epicly wrong. While individuals are prone to mistakes, it is hard for me to believe that all of these highly-successful pundits are wrong. Are the markets, then, whistling past the graveyard? I’m sure we’ll find out.
LIV

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